Rather disproves Piketty, no?

One of Thomas Piketty’s central contentions was that r>g, that wealth accumulates to those who already have it faster than the economy grows. Thus the wealth of the plutocrats grows like Topsy until it swallows the entire economy. That this doesn’t happen is obvious for it hasn’t. And why it doesn’t isn’t for the reason that Piketty advanced, that we’ve had two world wars and all that. Rather, it’s encapsulated in that old saying, clogs to clogs in three generations.

Grandpa makes the money, the kiddies preserve it, the grandchildren splurge it.

Now, obviously, we can prefer to believe a Frenchman with a theory to sell or we can appeal to the accumulated wisdom of our forebears by noting the proverbs in which that wisdom is passed on to us. Our choice, entirely so, but one of the two options is likely to lead to a happier life and a closer accord with reality.

An interesting example of which to choose, which might accord better with that universe outside the window, is this story of who lost money on Theranos:

A who’s who of government, business and international finance lost a total of more than $600 million they had invested in scandal-plagued Theranos Inc., according to previously sealed documents made public in a lawsuit.

High on the list is Education Secretary Betsy DeVos, whose family invested $100 million in the Silicon Valley blood-testing company, the documents show. Mrs. DeVos had previously disclosed that her family was a Theranos investor in a government filing, but the size of the investment wasn’t known.

Note who didn’t lose money in this. The VC funds specialising in this area of investment. The reason they didn’t is that none of them invested in this dog of a company. The people who did were the rather more gullible who thought they’d found something the experts had missed:

Documents unsealed in a lawsuit brought against Theranos reveal a number of the high profile investors who had a stake in the nearly worthless start-up: The Waltons, founders of Walmart, with $150 million; Rupert Murdoch, with $125 million; and the DeVos family, including Education Secretary Betsy DeVos, with $100 million. The investments were made between 2013 and 2015, according to the Journal.

Do note something that Piketty asserted. Not only that r>g, but that richer people get a better return on their investments than poorer people. He specifically insists upon the idea that because such rich families can hire the best to run family investment offices and the like that they will gain better investment returns than the average on the market. So, not only does capital swallow the economy but the more you’ve to to start with the higher the pile of moolah you sit upon at the end.

Well, yes, and aren’t we just seeing the testing of that idea against objective reality?

Perhaps the most notable individual on the list is Education Secretary Betsy DeVos, whose family invested $100 million—literally 100 times the lifetime earnings of the average American—in Theranos between 2013 and 2015.

Spanking 100 lifetimes of average income away on a fraud is just a great way for capital to concentrate, isn’t it?

From this example it is still possible that r>g of course, even if that’s not something actually evident in any extant society. The further contention that the rich gain even higher investment returns does rather seem to be dented though. Because those who inherit have been known to splurge on some pretty fantabulous frauds over the generations.

Another way to make much the same point is that the Queen of England, Elizabeth II, is the product of 1,000 years, an entire millennium, of being at the top of that wealth and privilege tree. Her personal fortune, not the Crown Estate nor the art collection etc, is put at £100 million or so. Hey, whatever, a few times that perhaps, less possibly. After one fifth, one sixth, of recorded history or so as top beings, her family has less than one thousandth the fortune of Jeff Bezos, who started out with nowt but a door on two trestles 30 years ago. Brenda is rather the proof that the rich don’t gain better investment returns than everyone else. Or perhaps you’d prefer the examples of Betsy, Rupert and whatever the hell the Waltons are called in this generation?

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  1. You’d really need to know whether the DeVos fortune continued to grow and Theranos was just a bad investment in a portfolio that generally did well, or did the Theranos investment really put a ding in the family pot before drawing any real conclusions about whether this contributes or detracts from Piketty’s about the rich having access to better investment advice and thus returns. The comparison between the queen and Bezos doesn’t seem that apt. Is the queen even trying to maximize her wealth (or even permitted to try)? Even if she were to try, isn’t the usual experience that a diverse portfolio will generally outperform a concentrated one, but that there will be a few concentrated ones that outperform all the diverse ones?

    • TD,

      “Even if she were to try, isn’t the usual experience that a diverse portfolio will generally outperform a concentrated one, but that there will be a few concentrated ones that outperform all the diverse ones?”

      Which is why you get new rich people. They take a risk on something that goes stratospheric and they become Bezos, Zuckerberg, Gates and their investment massively outperforms a diverse portfolio. And that diverse portfolio doesn’t last forever. You still need something to live on. Every time your kids marry, the fortune gets spread out. Then there’s the kids who throw money at barmy investments or just squander money.

      • Agreed. If you want a dynamic economy with lots of new products and services, such enterprises are usually very closely held to begin with, and so the founders and early investors become very rich. But yeah, they’ll die and their estates will be dispersed. Whether they squander it or not probably depends a lot on how well the trusts are structured.

        So, can we say it’s possible that a more equal society may also be a stagnant one?

  2. That “wealth accumulates to those who already have it” (or “the rich get richer”) is saying nothing but that money is useful. If you don’t need it now and loan it to someone who does, you get paid for that favor, and your money grows exponentially. Demagogue Piketty, fleshing out his conspiracy theories, is going to continue to be wrong about everything, notably that Income Inequality is something real or important.

    Theranos investors got what they paid for: A chance to hob-nob with famous Directors, and the pride of seat-of-the-pants investing, shunning advice from those know-it-alls in the Venture Capital industry. The CEO said the prototype was real, and she looked so convincing. It doesn’t matter that DeVos had “access to better investment advice.” She did not take it!

    • the rich have access to all sorts of investment advice, much of it quite costly in fees, never mind that it is also often bad advice. I think Warren Buffet has commented that most people, rich or not, would be better off investing in index funds and ignoring most other advice, unless they are willing to do the research themselves that he is willing to do. And he’ll acknowledge he has his share of mistakes.

      There’s a lot of smoke blown in Silicon Valley. But, there’s also good stuff. But the VCs themselves make a lot of bad bets, though they may have largely avoided this one.